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retirement savings and nest egg will last longer, but I think this is still something to weigh and consider on a very individual basis. Peter, hello. Good to see you. Welcome back, everyone. We start with a timehonored classic and question. Should you tap your retirement savings to pay off your mortgage? A lot of people want to go into retirement debtree, which is why it turns into a financial goal, paying off your mortgage, right? But before you write that final check, you recommend crunching the numbers and
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thinking through some unforeseen consequences. So, let’s do that. I know this is painting with a broad brush, but should you pay off your mortgage before retiring? >> Well, I mean, having a paidoff mortgage is definitely a benefit in retirement. I mean, that’s probably one of our largest line items in the budget is the mortgage payment. So, having a paid off mortgage to retire into and throughout retirement is going to reduce monthly expenses and cash flow needs and requirements, which
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is what retirement stress is really built upon is how much am I spending monthtomonth and how much do I have left in those accounts to continue generating that. If we cut the expense side, then the retirement savings and nest egg will last longer. But I think this is still something to weigh and consider on a very individual basis. But the the question of is it good to have a paidoff mortgage? I I don’t think anyone could argue no that that’s a terrible thing. It it is a good thing no matter where
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we’re at. It’s just it usually takes 30 40 years to get there. >> Right. Exactly. Well, and I’m sure a big variable would be your interest rate. Right. We all know somebody who has 3% or less right now. So how do you balance the numbers with peace of mind >> and they are clinging on to it and not moving anywhere so that they can retain that very low and attractive interest rate which is obviously not where we are at right now if we go into a new uh mortgage and and new interest rate. So
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we do need to weigh this carefully. I mean, there are repercussions for the source of funds to pay off a mortgage. And that’s really the the crux of the consideration here is what is the source of funds? What is the cost to get to those dollars? And what could those dollars be doing for you otherwise? So there’s some math side to this and there’s some mental emotional side to this but bottom line is that interest rate plays a part into the math. It’s not the total picture and right now I
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think that there are a lot of people who uh are are still retaining these very very low interest rate mortgages. And by the way uh as as you know Aaron I’m a Dave Ramsey smart investor pro. I don’t think there’s anyone who hates debt more than Dave Ramsey. But even Dave puts paying off the mortgage as the last step in the baby step process after saving for retirement, building up that nest egg, after helping the kids with college expenses and education, and right before figuring out how to give away money. So
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that’s where even Dave Ramsey puts paying off the mortgage in your financial progress and process. But nothing wrong again with having a paid off mortgage. A huge benefit for retirement cash flow and peace of mind, >> right? And and like like we talked through, I think a lot of people just it’s such a an emotional decision to choose to pay off that mortgage. So if I came into your office and I said, “Hey, listen, Peter, I’m really going to sleep better at night if I am not writing that
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mortgage check. When do I tap my retirement accounts to do that? Would you give me permission?” uh it would it would be a a conversation and a consideration. However, if we are tapping a large portion of retirement accounts or even just a large dollar amount, it doesn’t have to be proportionally a a huge amount if you’ve got more sizable accounts. But if we are tapping a large dollar amount of retirement accounts, again, we need to consider the source. So money is not all math. A lot of it is math. Adding,
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subtracting, addition, interest rates, compounding, but there’s also a mental, emotional, and psychological element of of money that has to be weighed into this consideration. And we cannot ignore that with with really any financial decision that we are making. If we would be just more comfortable, confident, live day-to-day life a little easier with having a a paidoff mortgage, that does weigh into the equation. But we also have to look at again the opportunity cost. What could this money be doing compared to how much it’s
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costing you to have this mortgage? And most importantly, is there a cost for getting to the money? So your question all that to say your question specifically was tap retirement accounts and a large portion of retirement accounts these days are tax deferred yet to be taxed or taxed advantaged if we leave them alone. If we’ve got some idle cash sitting around that doesn’t have tax implications to get to, that makes this a a lot easier of a consideration, Aaron. But even non-qualified after tax, nonretirement investment
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accounts might have some builtup capital gains where it’s going to cost us a a a a significant tax hit to get to those dollars and and access them. So, if we’re paying off a mortgage with a relatively small amount and it’s not going to impact our tax brackets or cost us unnecessary additional taxation, maybe then it makes sense to take out a chunk of money and and put it on the mortgage and just be done with it. But if we are going to move ourselves up tax brackets, if we are going to have uh tax
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implications, income tax as a result of liquidating a large chunk of tax deferred retirement accounts, if we are going to liquidate the opportunity for tax-free growth from Roth accounts, like that all needs to be weighed into this consideration. And unfortunately, like most people don’t have a a sizable chunk sitting just around in in bank accounts that does not have at least some amount of tax implications to access it. If we do and we want a paid off mortgage, fantastic. Like why are we waiting,
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right? But we do need to weigh the considerations for how much it’s going to cost us for accessing a big portion of money verse how much are we actually saving by paying off the mortgage when we do so. >> Right. There’s so much to dissect here. Let’s just touch on something though that you mentioned a second ago, which is some of the pitfalls that maybe people aren’t thinking about, especially when it comes to large withdrawals from retirement accounts that were tax deferred because
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this can create huge tax issues. you talked about perhaps even jumping into another tax bracket. Not only does it reduce your liquidity as well, this could also even increase your Medicare premiums. >> Absolutely could. And and let’s just say we’re a married couple filing jointly and we’ve got about $100,000 of income. Well, that puts us right near the top of the 12% tax bracket. So, if we were to pull out an additional, say, $100,000 or even $50,000 to pay off this mortgage, all of that money is then going to fall
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into the 22% tax bracket, which means we’re paying 10% more than we need to to access this money. And that’s going to account for several years worth of the interest, right? If we take out a big chunk of money and pay 10% on the entire amount versus if we’re paying three or 4% on a on an interest rate and we could do this over a couple years, we’ve got to crunch those numbers. And so we we need to look at where are we in our tax brackets? What’s the source of the funds? Is it going to cost us more in
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taxes? Is it going to move up those brackets? And then we’ve got some ancillary considerations here especially if we are around Medicare age. And remember Medicare looks back two years. So we would be talking at like 63 years old or above when people are making this consideration. And you see the uh the Irma brackets there on the screen. Irma is a really uh unexpected additional expense basically means testing of your Medicare healthc care premium amounts. And if your income is over certain
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thresholds, that causes you to then pay more than you need to for your Medicare premiums. Well, if that is avoidable by spreading out paying off the mortgage over a few years rather than doing it all at once, that is also something that is going to play into these considerations. So, just things that people don’t always necessarily think about. And there have been a lot of times where I’ve talked with a client. This is a obviously a question that I work through specifically case by case
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with clients. It’s it’s a it’s a big one. People want to do this. But there have been many times where they’ve said, “Well, I want to have a paid off house.” We crunched the numbers and we figured out, “Yes, this is a go, but not all at once. Let’s do this over the course of the next two or three years to avoid some of these unnecessary and unintended additional expenses when it comes to taxes on income, your brackets, your social security taxation, your Medicare
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premiums, avoiding Irma. There’s just maybe a more efficient way to do this, not all at once, but over a shorter period of time than what the bank would ideally have you pay them over. I’m I’m of a mindset though when when I like see the math in front of me, it helps me feel better about kind of sticking with the game plan which is sticking with the mortgage payments also because when you are nearing retirement, Peter, you know this, your payments are largely going towards principal at that
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point, not interest, right? >> As as Yeah. as we get closer to having it paid off in in the in the tail years of an amateurized mortgage schedule, your payments are going much much much more toward the principal. In fact, you know, the the the rate that you are quoted is an amateurized rate, meaning that’s the rate if you keep the loan on the scheduled payment through maturity. But as everyone knows, in the first 10 years or so, most of those payments are going to interest. That’s where you paid
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most of your interest in the tail end years, last five years, 10 years of a mortgage, you are increasingly paying more and more and more toward principal anyway. So, yeah, you’re right, Aaron. It it really depends on where we’re at in this thing. Now, if we’ve got like a large windfall of after tax money, I’ve dealt with several clients recently that got inheritances and this was after tax money and it was kind of a gift to them. there were no additional tax implications and they were like, “Hey,
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we’ve always thought of having a paid off mortgage. It it would be a great idea. What a better gift uh that your loved one has left you.” But again, I think that it it needs to be weighed and evaluated on a case-bycase basis whether it’s the absolute best thing for you or not. I get it. It’s a very common goal. That’s why we work through it with our clients at Rashan Planning. Your bank has one schedule for you to pay them off. You might have uh aspirations of a of an accelerated schedule. Let’s make
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sure that it makes sense. Not just from a I want to be debt-free perspective, but from a financial math >> perspective as well, that you don’t have any unintended consequences with the expenses of accessing it, the taxation, the Irma, the the social security taxes, all of those things should be included into this. And that’s why we work through this as part of the optimized retirement plan. Aaron, >> all right. So much to consider. Like you said though, there’s no cookie cutter
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answer because we all feel differently about how we spend our money and what it’s doing. So Peter, if somebody would like to sit down, crunch numbers with you, what’s the best way to reach you? >> Give me a call. 919-30005886 91930005886. You can go online rashplanning.com. It looks like richonplanning.com. And Aaron, you’re absolutely right. We all feel different about this because some people are looking to have that paid off mortgage. Some folks that I deal with, some of my clients are
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actually purposely going out and getting an additional mortgage for a vacation, a beach or a lakehouse a at retirement and they are perfectly comfortable with having that as part of their monthly cash flow plan. So individual and that’s why it’s something we work through. >> Yeah. All right, Peter, thank you so much for your time today. >> Thank you, Aaron. Hey folks, Peter Rashan here with Rashan Planning. So glad that you are enjoying the podcast Planning Matters Radio. You
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know, one of the tools that we’ve put out there that people really seem to appreciate and really are our finding of value is at 919.com. It is your retirement tax bill calculator. If you’ve got any kind [music] of retirement account, your tax deferred 401k or IRA, this is the website. This is the resource where you can go, you can plug in your own numbers, your information. You can slide the the the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is
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likely to be if you default and defer to the IRS’s plan versus what you could potentially bring that tax bill down to. A lot of times it is a very significant savings. So if you have not yet, go to the website 919retired.com. Run your numbers on the retirement tax bill calculator. >> This has been planning matters radio. >> The content of this radio show is provided forformational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek
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investment, tax, or legal [music] advice from an independent professional adviser. Any investments and/or investment strategies mentioned involve risk, [music] including the possible loss of principal. Advisory services offered through Brooks Own Capital Management, a registered investment adviser. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management, while
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